Question

Diversifun, Inc., an insurance company, recently decided to offer boat insurance. Diversifun was concerned that the most likely boat insurance customers would be the least competent, highest-risk boat captains, because they stand to benefit most from boat insurance coverage. Since Diversifun cannot distinguish perfectly between high-risk and low-risk skippers, it decided to set its boat-insurance premiums a bit higher to account for the foolhardy sea captains. The economic problem in this story is known as:a. Adverse selectionb. Signalingc. Moral hazardd. Screening

Answer 1

The correct answer is letter "A": Adverse selection.

Step-by-step explanation:

Adverse Selection occurs when one party in a transaction has more information than the other, leading to a negative consequence for the party "in the dark". This often happens in insurance and finance-related activities when certain customers make the service being offered unprofitable or less profitable.